Binary options money management system
What is Money Management?
Money management is important for anyone who is considers trading on the stock markets. But what exactly is money management?
In normal language it means to skill to administer risk or the ability to manage the money in your binary option account with the ultimate goal: making profits. It seems easy, but to trade profitably in the long term is easier said than done and only through the application of solid money management techniques can this be achieved.
There are many money management techniques and tips available. For example overtrading techniques as well as more complex techniques, the most important one however is also the most classic one: never bet on one horse, diversify.
First you look in what currency pairs you to trade binary options, and then you decide how much you want to invest. Then you divide this amount between the various currency pairs you want to trade. Finally, you again divide this amount into smaller amounts so you’ll be able to trade a currency pair multiple times. This allows you to be wrong occasionally, but eventually still make money.
Use different expiry times
To be more specific: always choose different expiry times since stock markets are known to be extremely volatile and by setting different expiry times your money management is safer. Applying various expiry times is key in having a solid binary options money management system. Try to analyse the larger time frames and avoid peaks on the chart.
Money management only works if you diversify your portfolio, otherwise it just works as a protection against unpredictable movement on the stock markets. The whole idea of money management is only useful if you diversify your investments.
Let’s start with the broker. There is a saying that you should never bet everything on one horse, and this is also the case when it comes to binary option brokers. It is recommended therefore to divide your investment among several brokers. For example, if someone is interested to fund a trading account with $ 5,000, the first logical step is to divide this amount into 2-3 equal parts and make a deposit with 2- 3 different brokers.
In this way, the risk a broker goes bankrupt or cannot fulfil its promises is reduced by 2-3 times.
The second step is to divide the deposited amount with each broker among various assets and financial products offered by the binary option broker: Forex instruments (currency pairs), indices, stocks, oil, gold, and other commodities.
The reason this step is necessary is because various types of assets are driven by several factors and motives. For example, an increase in interest rates may be beneficial for one asset but disadvantageous for another. If the ECB (European Central Bank) or another large central bank increases interest rates, all Euro related currency pairs in the Forex market as well as Euro denominated stocks will be influenced and volatility will increase in comparison to US shares or US currency pairs like USD / CHF and USD / CAD.
With respect to what we have said before, it is vital that your portfolio is divided in equal parts based on what assets you are trading.
The next step in your binary options money management system is to divide asset classes into sub-classes if possible. Suppose an asset has four sub-classes, then you allocate 25% of the amount for the asset class to each sub-class to diversify risk optimally.
The perfect example of this can be found on the Forex market where currency pairs can be divided into majors and crosses. We know that majors move faster than crosses and therefore require different approaches.
The last thing you do is to split your investments in the currency pairs you want to trade. It doesn’t make any sense to trade correlated currencies, unless you get a better price or pay out. If you buy EUR / USD call options and the market is moving in your direction, it is senseless to buy call options GBP / USD. It only leads to overtrading and overexposure. In the article Money Management – How to prevent overtrading you can learn more about this.
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